Judge Says Lincoln’s Parent Can Challenge Regulators’ Ability
In a setback for federal regulators, a U.S. District Court judge ruled Friday that the parent company of Irvine-based Lincoln Savings & Loan has the right to challenge the government’s competence to operate 11 subsidiaries of the seized thrift.
But Judge Paul G. Rosenblatt, while ordering a May 16 trial on the matter, refused to oust regulators from their management roles at the subsidiaries and restore control to the S&L;’s parent firm, American Continental Corp. of Phoenix.
Control of the subsidiaries is a key issue in the battle between federal regulators and American Continental because the 11 units own or control nearly $3 billion of Lincoln’s $5.4 billion in assets, mainly real estate developments in Arizona, Texas and Louisiana.
The court hearing came a week after regulators seized control of Lincoln, placed it in a conservatorship and ousted executives at Lincoln and many of its subsidiaries. It alleged that its owners were engaging in “unsafe and unsound” practices and were dissipating Lincoln’s assets.
The day before the seizure, American Continental filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code on behalf of itself and the 11 Lincoln subsidiaries. The company did not include the S&L; itself in the bankruptcy filing.
Friday’s hearing involved a lawsuit filed by American Continental challenging the government’s authority to replace the managers of the 11 subsidiaries. The company contends that regulators are not equipped to help reorganize the subsidiaries while they are under bankruptcy court protection.
In a separate lawsuit filed in U.S. District Court in Phoenix, American Continental is seeking $150 million in damages from the Federal Home Loan Bank Board and its deposit insurance arm as a result of the seizure.
American, controlled by fiery financier Charles H. Keating Jr., has not yet directly challenged the legality of the seizure, but attorneys for the company said a lawsuit seeking to restore control of the S&L; to the company will be filed within the next few weeks.
Keating, in a brief interview following Friday’s ruling, said he was “delighted” with the action. “We will finally get a chance to tell our side of the story,” he said, referring to the pending trial.
Keating said the trial will be the first time that thrift regulators have been forced into court to argue their right to run subsidiary operations of a seized S&L.;
Plans to Take Actions
But the Federal Deposit Insurance Corp., which is managing Lincoln’s affairs, said it, too, was happy with at least one part of Judge Rosenblatt’s decision.
“We feel very good about the judge saying we are in possession” of the subsidiaries, said Lamar C. Kelly, San Francisco regional director of FDIC’s liquidation division. “We intend to take a number of actions regarding those subsidiaries in the next few weeks to show that we have the capacity to manage their assets effectively.”
Among those actions, he said, is a plan to hire a commercial hotel management company to run the huge Phoenician resort hotel complex in Scottsdale, just outside of Phoenix. Lincoln, through one of its subsidiaries, owns 55% of the hotel.
In their court arguments, attorneys for American Continental claimed that the government’s firing of the top executives of the 11 subsidiaries will cause financial damage to creditors, including 22,000 individuals who own $260 million of unsecured American Continental bonds.
Company attorneys claimed that the government sidestepped bankruptcy laws by taking direct control of the subsidiaries and charged that the regulators intend to liquidate the subsidiaries’ assets. American Continental’s management, they said, intended to use the bankruptcy reorganization process to rebuild the companies and cure their problems.
Government attorneys argued that regulators have the right under the conservatorship to run Lincoln and its subsidiaries as they see fit, including replacing managers and even petitioning to dismiss the bankruptcy proceedings.
Cites Big Retainers
During nearly three hours of testimony, government attorneys alleged that American Continental has a history of mismanaging the S&L; and its operating units.
They cited a chain of circumstantial evidence indicating that $5 million in retainers paid to American’s bankruptcy lawyers was actually paid by Lincoln. They also referred to sealed affidavits that they said would further support their contentions of mismanagement.
Federal Home Loan Bank Board Chairman M. Danny Wall said earlier this week that his agency had referred criminal allegations involving Lincoln’s management to the Justice Department.
Some of those actions, according to court testimony, could involve fraudulent transfer of funds among Lincoln and its subsidiaries.
But American Continental’s attorneys, in urging Judge Rosenblatt to set a trial on the issues, said they would show that those fund transfers actually were ordered by the federal bank board.
